Essentials of Financial Risk Management

CHAPTER 6

Currency Risk Management

Introduction

Currency risk arises from the fluctuations in exchange rates between currencies. Currency trading is the largest trading market with an estimated $3 to $5 trillion being exchanged on a daily basis. Although exchange rate fluctuations are somewhat controlled by central banks, the control has at best a dampening effect and is a secondary factor. Thus, we see wild variations in exchange rates and exchange rate crises such as the Thai Baht crisis in the late 1990s.

Currency risk arises in many different forms. It can be transactional—such as repatriating sales achieved in a foreign currency or paying expenses in a foreign currency, or it can be translational—adjustments to the financial statements based ...